What is Economic Contagion? 

By : Neha Dhyani

Updated : Mar 8, 2023, 15:45

An Economic Contagion is a phenomenon in which an economic crisis spreads over to other markets, regions, or countries. The term became popular during the 1997 Asian Financial Crisis, but the concept was there in functionality even before. The Great Depression which took place mostly in the 1930s is a striking example. It can take place at the domestic as well as international level.

Significance of Economic Contagion

As the global world has become widely interconnected through monetary and financial systems, contagion can occur due to the interchange of goods and services among different economies. This interconnection prevents economic shocks and could also provide an impetus for such shocks. Modern-day academicians view the interconnectedness of the world economies as symptomatic of the contagion.

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Causes of Economic Contagion

In the age of Globalisation, economies are interconnected and interdependent on one another. An event occurring in one place is likely to have its effects felt on the other side of the world. These world economies supplement each other with labour, capital, and goods. It can be said that these economies are a complex web of producers and consumers.

When markets are robust, if any falter in one market spreads across other markets, then the impact upon participants such as individuals, corporate sector, banks, governments, etc., will be reduced. On the other hand, when these markets are rigid and fragile, then any negative occurrence in one market may cause the other related markets to fall. In such instances, even a whole economy can collapse.

Therefore, the deciding factor of Economic Contagion is the robustness/fragility and flexibility/rigidity of the markets. The depth of interconnection between markets also determines whether or not a contagion could take place. If a market is experiencing a negative shock but has loose ties with other markets, then the other markets are likely to be oblivious to the economic shock.

Consequences - Impact of the Asian Financial Crisis

The 1997-98 Asian Financial Crisis is also known as the Thai Baht Crisis. It began in Thailand and soon spread over to other neighbouring nations. It is regarded as a major world financial crisis. Here are some key points.

  1. It started as a currency crisis when Bangkok decided to unpeg the Thai Baht from the US Dollar.
  2. This resulted in repercussions such as various currency devaluations and capital flights.
  3. The value of the Indonesian Rupiah got reduced by 80 per cent, the Thai Baht by 50 per cent, the South Korean Won by 50 per cent, and the Malaysian currency Ringgit was down by 45 per cent.
  4. These economies experienced a loss of capital inflow of more than $100 billion.
  5. The crisis was grave both in its effect and magnitude that it became a world crisis as it reached the Russian and Brazilian economies.
  6. The Asian Financial Crisis reflected the incompetence of organisations such as the Asia Pacific Economic Cooperation (AEPC) and the Association of Southeast Asian Nations (ASEAN) and raised questions about their relevance.

Economic contagion or shock can be avoided by properly managing the trade links and financial links both domestically and internationally.

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FAQs on Economic Contagion

Q.1 When was the term ‘Economic Contagion’ first coined?

Though the phenomenon had been evident for many years, the term 'Economic Contagion' was coined in 1997 during the Asian financial market crisis.

Q.2 What is Economic Contagion?

Economic Contagion is the spread of financial crises from one country to another; it can also happen at the domestic level.

Q.3 How does Economic Contagion spread so quickly and all over?

Since the markets are interdependent both internationally and domestically, and therefore Economic Contagion spreads very quickly on both levels.

Q.4 When did the Asian financial crisis take place with regard to Economic Contagion?

Asian Financial Crisis is one of the most popular Economic Contagions that took place from 1997-to 98, in Thailand.